Debt by Dysfunction

The 2025 Crossover: Already Happened

For the first time in peacetime history, net interest costs on federal debt exceeded defense spending in 2025¹. This isn't a projection about future risk, this already happened in fiscal year 2025. The United States government now spends more servicing its debt than defending its borders, projecting military power, maintaining nuclear deterrence, and operating the entire Department of Defense combined.

Net interest payments reached $970 billion, consuming 18.4% of all federal revenue². This represents the highest share of revenue consumed by interest since 1991, when it peaked at 17.5%⁸. But today's burden arrives with debt at 125% of GDP⁵, compared to just 39% of GDP during the 1991 peak¹⁰. The trajectory from here is relentless.

Defense represents roughly 13% of total federal spending²⁴. Interest surpassed it not because defense shrunk, but because interest costs exploded. And this crossover is permanent. There is no scenario under current policy where interest costs decline back below defense spending. The die is cast.

The 2027 Threshold: Complete Crowding Out

By 2027, just 15 months away, interest costs will exceed ALL non-defense discretionary spending³. This category encompasses infrastructure, scientific research, education grants, federal courts, national parks, the State Department, the Justice Department, homeland security, veterans' healthcare, environmental protection, food safety, transportation, and the basic operations of the federal government. Interest payments will cost more than all of these functions combined.

Interest payments will become the second-largest federal program, approaching Social Security's size⁴. By 2035, net interest will consume 22.2% of all federal revenue,⁷ more than one dollar in five collected from taxpayers will go purely to compensating creditors for past borrowing. Unlike Social Security, which provides retirement income and supports consumer spending, or Medicare, which provides healthcare and supports the medical sector, interest payments deliver nothing. They do not build roads, fund research, educate children, protect the environment, ensure food safety, maintain courts, or secure borders.

The government is being permanently transformed from a nation that invests in its future into a debt-servicing operation that also happens to mail Social Security checks. This is not temporary crisis requiring short-term austerity. This is structural, irreversible, and accelerating.

The Maturity Wall: $2 Trillion in Commercial Real Estate Debt

In 2025, $957 billion in commercial real estate loans mature which is triple the 20-year average of $350 billion⁴². Combined with 2026-2027 maturities, over $2 trillion in CRE debt must refinance at interest rates 2-3 percentage points higher than the original loans, with property values down 40% or more due to permanent work-from-home shifts⁴³.

This cannot be refinanced at current valuations. Office buildings purchased at $100 million with 70% loan-to-value ratios now appraise at $60 million. The math is impossible: $70 million loan against $60 million property equals 117% LTV. Banks cannot refinance these loans. Defaults cascade.

CMBS delinquency rates reached 7.29% by late 2024. Thi is six times higher than bank portfolio loans⁴⁴. Some regional banks carry CRE exposure exceeding 500% of their equity capital⁴⁵. Live Oak Bank: 605%. Dime Community Bank: 550%. These institutions cannot absorb losses of this magnitude. The 2023 regional bank failures were the preview. The main event arrives 2025-2027.

The Convergence: Three Crises, No Backstop

Federal debt surpasses World War II's peak of 106% of GDP in 2029¹⁴. But unlike the post-war period, when debt was temporary and demographics favorable, today's debt is structural and rising. Interest costs exceed $1.1 trillion annually by 2029. The federal government operates with no fiscal space, no capacity for rescue, no ability to prevent the collision.

Three distinct crises converge in the 2028-2033 window, each removing the capacity needed to respond to the others. The commercial real estate collapse triggers regional bank failures. Bank failures freeze municipal bond markets. Municipal bond freezes force service cuts in fiscally stressed cities. Service cuts trigger middle-class exodus. Exodus collapses tax bases. And throughout this cascade, the 2033 Social Security deadline approaches, guaranteed to trigger economic contraction that accelerates every failure mechanism.

In 2008, federal debt stood at 65% of GDP. The government could authorize $700 billion TARP, absorb net costs of $31 billion, and rescue the financial system⁴⁶. In 2027, debt reaches 124.3% of GDP while running $2 trillion annual deficits⁴⁷. Attempting similar rescue triggers sovereign debt crisis. There is no backstop. The doom loop runs its course unmitigated.

Why 2033 Is Different: The Silence Breaks

For decades, politicians optimized for short-term survival by avoiding Social Security reform. The rational choice was silence: acknowledging the problem meant proposing solutions that guaranteed electoral defeat. Both parties could blame the other while the crisis remained theoretical. This equilibrium held because the consequences stayed in the future.

In 2033, that equilibrium collapses. The statutory deadline converts an abstract future problem into a compulsory present crisis. Congress must choose: implement cuts, authorize emergency borrowing, or pass massive tax increases. Silence is no longer possible. Inaction produces the most politically toxic outcome (automatic cuts), forcing action.

The 2033 deadline also arrives after eight years of deteriorating fiscal conditions. By 2033, Type B crisis has eliminated fiscal space, interest costs consume 20%+ of revenue, and federal debt exceeds 120% of GDP. The government has no capacity for moderate compromise solutions. Every option is extreme.

Not Nationwide Collapse: Geographic Stratification

The 2033 crisis does not produce Mad Max dystopia or civil war. It produces systematic fragmentation along geographic and economic lines. Your ZIP code determines whether you live in functional or failed America. Four distinct tiers emerge over 2033-2040 based on fiscal capacity, tax base resilience, and local government response to revenue collapse.

This pattern follows historical precedent. The Great Depression produced 25% unemployment but no civil war⁷⁹. Post-Soviet Russia experienced 40% GDP contraction and 9.3 percentage point life expectancy decline without societal collapse⁸⁰. Detroit lost 60% of its population from peak to bankruptcy over decades, eventually stabilizing at much smaller scale with gentrified core and abandoned periphery⁵⁴.

The difference from Depression-era America: today's population is older (median age 39.1 vs 26 in 1930⁵⁷), more urban (80%+ vs distributed rural), with depleted social capital and family structures that previously buffered hardship. The federal government operates with debt at 125% of GDP rather than fiscal space to deploy New Deal programs. These structural differences mean the same unemployment rate produces different outcomes, particularly regarding geographic mobility and service provision stratification.

Four Possible Endgames: History as Guide

The trajectory beyond 2040 depends critically on choices made during 2033-2040, particularly whether Congress implements Option 1 (automatic cuts), Option 2 (emergency borrowing), or Option 3 (comprehensive reform). Each choice leads to different endgame with probabilities determined by historical patterns and political economy analysis.

Societies under fiscal stress follow predictable patterns. They rarely collapse suddenly into failed states. More common outcomes: multi-decade stagnation (Japan, Italy), authoritarian restoration imposing order through force (numerous Latin American and Eastern European examples), fragmentation into semi-autonomous regions (Soviet Union, Yugoslavia), or crisis-driven reconstruction (post-WWII Europe, 1983 US Social Security fix).

The United States possesses structural advantages that make complete collapse unlikely: deep institutional capacity, federal system allowing regional variation, dollar reserve currency status providing buffer, armed population preventing top-down imposition, and strong property rights tradition. But sustained fiscal crisis erodes all institutional foundations. The question is not whether America survives but what form that survival takes.

Critical Variables Determining Endgame